Hensley v. Associates First Capital Corp. (In re Hensley)

Case No. 13-6304 (6th Cir. 2014)
Creditor not entitled to reform mortgage to encompass adjacent lot where action to reform mortgage was brought outside 10 year statute of limittions. Creditor not entitled to use equitable ubordination to extend mortgage, although prior mortgage encompassed two parcels, evidence indicated that borrower intended new mortgage to encumer only one lot and any "error" in the legal description was fault of lender and equitable doctrine of "equitable subordination" will not protect party who was at least in part at fault for creating error and then failing to discover error for more than 10 years.
Procedural context:
After debtor filed bankruptcy, lender filed adversary proceeding to reform mortgage on one parcel, contending that mortgage was intended to encumber described parcel plus an adjacent parcel. Creditor also contended that because new mortgage replaced prior mortgage on both lots, lender's new mortgage should be equitablly subordinated. Bankruptcy court granted summary judgment in favor of Trustee an debtors. District Court affirmed. On appeal th 6th Circuit affirmed the Bankruptcy Court's grant of summary judgment.
Debtor owned two adjacent parcels nd borrowed money from Harlan Nationl Bank encumbered by a mortgage on both parcels. Debtor later refinanced with Associates, but the mortgage describe only one of the two parcels. Some years later, debtor filed bankruptcy and asserted that debtors owned one parcel free and clear of lender's mortgage. In response, lender filed adversary proceeding to either reform mortgage to encumber both parcels, or to use equitable subordination to extend mortgage to both parcels. Court rejected reformation action as mortgage had been executed more than 10 years prior to commencement of action, resulting in action being barred by state's 10 year statute of limitations. Court also rejected equitable subordination noting that equity requries that party seeking to reform instrument have acted diligently and not be at fault in hte initial error. The Court concluded that the alleged error in the legal description was the fault of the lender in the first instance, and the substantial delay in raising the issue after execution of the mortgage demonstrated that lender was not without fault and had not acted diligently.
Norris, Clay and Keithledge

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